What is a Pip?

A pip (percentage in point) is the standard unit of measure for price movement in most currency pairs. For most major currency pairs a pip is 0.0001 (fourth decimal). For pairs where the Japanese yen (JPY) is the quote currency, a pip is 0.01 (second decimal).

Pip values depend on the pair and the trade size. Calculating pip value precisely is essential for accurate risk management.

Lot Sizes — Standard, Mini, Micro

Forex trade sizes are measured in lots:

• Standard lot = 100,000 units of base currency
• Mini lot = 10,000 units
• Micro lot = 1,000 units
• Nano/Other — some brokers support fractional lot sizes (e.g., 0.01 lot)

Lot sizes multiply pip value. Below is a quick reference for typical pip values when the quote currency is USD.

How to Calculate Pip Value (Step-by-step)

General formula (quote currency = USD):

pip value = (pip size / exchange rate) × position size (in base currency units)

Practical example: You trade 0.1 lot (10,000 units) EUR/USD at 1.1020. For EUR/USD a pip = 0.0001.

Pip value = (0.0001 / 1.1020) × 10,000 = 0.00009074328 × 10,000 ≈ 0.9074 USD per pip

This gives you an exact pip value ≈ $0.91 per pip. Many traders approximate $1 per pip for 0.1 lot when USD is quote currency, but precise calculation is better for risk control.

Spread — The Practical Cost of Entering a Trade

The spread is the difference between the ask and bid price. It effectively represents the immediate cost to enter a trade (for market orders) and is how many brokers and liquidity providers earn in normal conditions.

Spreads can be fixed or variable. During high volatility or low liquidity (night sessions, economic data releases), variable spreads may widen significantly.

Leverage — Amplifying Exposure

Leverage allows you to control a larger position with a smaller deposit (margin). It is expressed as a ratio (for example, 1:50, 1:100, or 1:400). A 1:100 leverage means you need 1% of the position size as margin.

Leverage increases both potential profit and potential loss. Use leverage prudently and always combine with sound position sizing rules.

Margin — What Your Broker Requires

Margin is the amount of money required to open and maintain a leveraged position. It is not a fee — it is collateral your broker holds while the position is open.

Initial margin calculation:

Required margin = (position size × current price) / leverage

Margin Call & Stop-Out Levels

Brokers set margin call and stop-out levels. A margin call alerts you that your free margin is low and you should either deposit more funds or close positions. A stop-out is the automatic closing of positions when equity falls below a critical percentage of used margin.

Always check your broker’s margin call and stop-out percentages and simulate worst-case scenarios before trading live.

Practical Examples & Quick Reference

Risk Management: Combining These Concepts

Good risk management combines pip/lot calculations, spread awareness, and conservative leverage:

1. Decide risk per trade as % of account (common: 0.5%–2%).
2. Choose stop loss in pips based on market structure.
3. Calculate pip value for candidate lot sizes (so that risk ≤ chosen %).
4. Check margin required and ensure free margin covers worst-case scenarios.

Position size formula (simplified):
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Position size (units) = (Account balance × Risk %) / (Stop loss in pips × Pip value per unit)

Quick Checklist Before Placing a Trade

• Have you calculated the pip value precisely for the instrument?
• Is the spread acceptable relative to your strategy?
• Does the required margin fit your account size and risk rules?
• Have you set stop loss and take profit based on volatility and support/resistance?
• Are you using appropriate leverage for your experience and account size?

FAQ

Q: Is higher leverage always bad?

A: Not necessarily — leverage is a tool. Higher leverage increases risk and requires stricter risk controls. Use it only if you understand the implications.

Q: Should I always use micro-lots when starting?

A: Starting with micro-lots is a good way to learn without large financial exposure. It helps you internalize emotions and execution issues at small cost.

Q: How do spreads affect scalping?

A: Scalping strategies depend heavily on tight spreads. Choose highly liquid pairs and brokers with consistently low spreads for scalping.

Next Steps

Proceed to practice these calculations on a demo account. Build a simple spreadsheet or use online calculators to compute pip values, margin requirements, and position sizes. Then move to the next lesson: Major, minor, and exotic currency pairs to learn how pair selection impacts pip values and spread behavior.